Published on: December 3, 2024 / Update from: December 3, 2024 - Author: Konrad Wolfenstein
German automobile crisis: high production costs and low competitiveness – Image: Xpert.Digital
The German auto industry is in a quandary: changing challenges and opportunities
The biggest upheaval in decades: Why the auto industry must act now
The German automotive industry is facing one of the greatest challenges in its history. A combination of technological, economic and geopolitical factors have plunged the industry into a deep crisis. The following points highlight the causes, effects and possible solutions to this difficult situation.
Missed change to electromobility
A central reason for the crisis is the hesitant rethinking of German automobile manufacturers towards electromobility. While international competitors such as Tesla and Chinese companies relied on electric vehicles (EVs) early on, German car manufacturers stuck to the combustion engine for a long time. This strategy caused them to fall behind in the development and launch of competitive electric cars.
Demand for electric cars has recently plummeted in Europe, especially in Germany. This is due to several factors: the loss of government purchase incentives has made sales more difficult, and many consumers find the currently available models to be too expensive or impractical. In addition, Chinese and US manufacturers dominate the market with more affordable and technologically advanced vehicles. German manufacturers have not yet managed to develop comparable offerings, which further weakens their competitive position.
High production costs and low competitiveness
Germany is a cost-intensive production location. High energy prices and labor costs make it difficult to produce vehicles at competitive prices - especially in the entry-level segment. For this reason, German manufacturers are increasingly concentrating on the premium segment, where higher margins can be achieved. But here too the pressure from international competitors is growing.
Another problem is the low utilization of the production facilities. Many plants are only operating at about two-thirds of their capacity, reducing efficiency and increasing costs per vehicle. These structural weaknesses make it increasingly difficult for German car manufacturers to keep up with manufacturers from countries with lower production costs.
Strong international competition
Competition from abroad represents an immense challenge. Particularly problematic is the dependence on the Chinese market, which has long been considered a growth support for German car manufacturers. But the market share of German manufacturers in China is falling rapidly as domestic brands such as BYD and Nio are conquering the market with innovative electric cars. At the same time, these Chinese manufacturers are increasingly pushing into the European market and putting German car manufacturers under pressure.
Another weak point is the technological lag in software and digitalization. While Chinese and US manufacturers are equipping their vehicles with cutting-edge digital features - from autonomous driving functions to connected services - many German models appear outdated. These residues not only endanger competitiveness, but also the image of German car brands as innovation leaders.
Economic and geopolitical factors
The general economic downturn in Europe is putting additional pressure on demand for new cars. Many consumers are postponing major purchases such as car purchases due to uncertainty about their financial future. At the same time, geopolitical tensions are causing further uncertainty: potential punitive tariffs from the USA on German cars and EU tariffs on Chinese electric cars could further aggravate the situation.
The dependence on the US market, which is currently the most important destination country for German car exports, is particularly critical. Last year, Germany exported around 400,000 vehicles to the USA - more than to any other country. However, if Donald Trump is re-elected, new tariffs could be imposed on European cars, which would significantly reduce the profits of Volkswagen, BMW and Mercedes-Benz.
Structural problems and management errors
The crisis in the German automotive industry is also of our own making: unclear strategies and management errors have contributed to important trends being overlooked. An example of this is the back-and-forth between combustion engine and electric drive, which ties up valuable resources and delays innovation.
In addition, many manufacturers have maintained unrealistic return targets after high profits during the pandemic. This ambition leads to excessive pressure to save money, which in the long term hinders innovation and undermines the trust of the workforce.
Impact on employment and suppliers
The crisis is already having a noticeable impact on the labor market: around 130,000 jobs could be at risk as automobile production has fallen by 23% since its peak, while the number of employees has only fallen by 8%. Suppliers who have to adapt to the changing requirements of electromobility are particularly affected. Many are planning job cuts or restructuring in order to remain competitive.
Smaller companies along the value chain are also fighting for survival: the switch from combustion engines to electric drives requires massive investments in new technologies - a challenge that financially overwhelms many suppliers.
Strategies for dealing with the crisis
In order to become competitive again, German car manufacturers must make fundamental changes:
Focus on electromobility
More investment in research and development is needed to develop competitive electric cars - both in the premium and entry-level segments.
Expand digital skills
Digitalization must be consistently promoted – from software solutions to networked services.
Optimize cost structure
Production processes must be made more efficient in order to reduce costs.
Open up new markets
In order to reduce dependence on China and the USA, new sales markets should be developed - for example in Southeast Asia or Africa.
Strengthen collaborations
Partnerships with technology companies could help close innovation gaps more quickly.
Long-term perspectives
The German automotive industry is at a crossroads: Without fundamental transformation, there is a risk of this key industry losing its importance for the German economy in the long term. But despite all the challenges, the crisis also offers opportunities: with a clear focus on innovation and sustainability, German manufacturers could once again take a leading role in the global automobile market.
It will be crucial how quickly and decisively companies and politicians can act. Because one thing is certain: the future of the automobile will be electric, digital and sustainable - anyone who does not make this change in time will risk their existence in international competition.
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